How to Play the Housing Market Rebound

Even though new home sales declined in last month’s report (which highlights December), I think there is still underlying strength building in the housing market. Home building has been surging, and December is typically a slow real estate month anyway. With interest rates continuing to be at historical lows, and more and more people getting into solid jobs as the employment market rebounds, it points to a strengthening housing market that will boost the economy and provide a lot of different investment opportunities.

The Signals Pointing to a Housing Market Rebound

There are a lot of signals pointing to a housing rebound. For many of the same reasons that the municipal bond market is going to rebound, the housing market should also be rebounding. The biggest is the gap between supply and demand.

On the supply side of the equation, housing supply is at record lows. Several signals point to this:

Low inventories across the nation

Rising real estate prices

Non-market inventory isn’t posed to move (underwater mortgages, etc.)

On the demand side, there are several factors that are creating the housing imbalance:

Improving job market

Record low interest rates

To combat the housing supply imbalance, home builders are pushing new housing starts are getting back to pre-recession levels. New housing starts reached 954,000 in December 2012, which is almost 30% higher than a year earlier. Home builders are building because there is demand – otherwise they wouldn’t be committing so much capital. They recognize that housing is in short supply and are trying to match market needs.

All of these factors are pointing to a housing market rebound.

Focus on Suppliers of the Housing Market Rebound

So the biggest question is how you should play the housing rebound…

The biggest thing to focus on should be the suppliers of this rebound. When a market rebounds, the first place that starts to see improvement is the supplier market, because before a home can be built, the builders need to buy the raw materials to make it happen.

Think about what goes into building a house: wood, fasteners, plumbing and electrical supplies, and more. A builder needs to buy these items first to construct the home. That’s why suppliers typically reap the first rewards of a market rebound.

With that in mind, some key players to watch in this space include Weyerhaeuser (WY) and other timber REITs like WOOD. You may also want to look into a construction supply company like Fastenal (FAST), which provides the fasteners and other suppliers like plumbing and electrical to home builders.

Jump in on Home Remodeling

If you go back to the supply and demand equation, one factor that is keeping supply down is the lack of people moving and buying new homes. However, with interest rates so low, this does improve the incentive for people to remodel their existing homes.

For people who’ve decided to settle in, the low interest rates and improving employment conditions may give people confidence to invest in their homes. This should improve many of the retail-side home remodeling companies like Home Depot (HD) and Lowes (LOW).

As more consumers go out and invest in their current homes, these companies should see a boost to their bottom lines.

Avoid Home Builders

However, even given that the housing market is going to rebound, one area that I’m avoiding is home builders. As I mentioned above, home builders are the last to reap the rewards of the housing rebound, and they bear most of the risk.

They have to put out the capital in advance to purchase the supplies and build the homes. Then, they have to spent the time building the homes, which can take months and years. Then, they have to sell them to the public.

During that time, a lot can change – interest rates could rise, the employment market could stall, or more. There is a lot of risk for home builders, and the reward may not be the good. If housing prices stall, the margins that home builders see will fall, compressing profits.

For that reason, of all the companies that will fuel a housing rebound, I’m steering clear of home builders and focusing on the companies that will supply the rebound.

What are your thoughts on the housing rebound? Are you investing in it?

Comments

I’m not actively investing in the home rebound. I would imagine that as things improve, more stocks associated with home building and remodeling will float towards the top of my screening litsts. I do own LOW and it has been very good to me over the past year and a half or so.

At the moment the rental market is strong because so many would-be homebuyers can’t qualify for home loans on account of their short sale, bankruptcy, or other recession-driven mishap. Those folks are forced to rent, inflating the rental market. In time, of course, they will qualify again and buy again. Which will drive home prices even higher.

And that would be a perfect time to sell at a tidy profit. High rental + tidy resale profit = not a bad way to go.

Good post Robert! I agree that the signs to seem to be pointing to a housing rebound and we’re seeing it where we live. I am investing in it, focusing primarily on retail home improvement stores, though I am thinking I should’ve picked HD over LOW. I am also looking at a couple of timber REIT’s.

I think this was a great post and something I have been talking about with people a lot recently. One thing I would add or at least offer is trying to come up with a team of people if you can’t jump in on your own yet. Kind of like an investing club but for flipping real estate. You could even try to look for specific specialties or people in trades to help make the group as efficient as possible. It’s a way to share the risk, share the costs, and yes share the profit but at least you are getting in on the potential swing in the market.

There are some real estate companies that will help you invest as a group as well, and others who try to organize the deals. Just make sure that you fully understand what you’re getting into in this risky space.

The market in Phoenix has improved dramatically thanks in large part to investors, many of them Canadian. With margins squeezed out of the market investors are bailing. This speculation is a two-edged sword, on one hand it provides a floor of support for prices and on the other causes rapid price inflation that often leaves many unable to compete with the cash buyer.

I was thinking this was going to be more of why I should buy a home now but this is even better. I like that the options you are giving can kind of fit any budget. Unlike buying a home you have more room and options with this list.

Wow Great advice. I love these options to invest in. And you are so right about getting in now. We own a rental property and it is giving us good return. Id like to refinance but we are trying to get some other bills straightened out first.

My favored play would be to pick the diversified big box retailers like HD and LOW. I don’t think they are bargains at this time however and they are a little more expensive than what I’d like. I may look to sell some put options against them and see if I can pick them up a little cheaper.

Signs seem to be looking up in many places. Where I’m at, after years of declines, I’ve noticed that there is now some stability in prices. I like the rental home market, for reasons mentioned in comments above. Though admittedly, I’m not going to be making such purchases. Simply more oriented to the single family home as a residence concept!

As far as I know if you look at investing in housing history you will see that it isn’t a very good investment to begin with. It turns out that in the long term it returns about 4% yearly which is much lower than stocks.

That’s a really great point, but if you look at my suggestions – REITs, supply companies, and home remodelers – all of those are stocks. I’m proposing using the housing market rebound, not to buy a house, but to invest in the suppliers of it.

Most people don’t know, but there are actually portfolios put together in this segment that have a combination of homebuilding and home improvement. If you go to http://www.ftportfolios.com or hit me at ted@oxygenfinancial.net, I’ll send it to you. Great stuff!!!

Awesome breakdown of who benefits in a housing market rebound. I didn’t realize home builders are the riskiest bets, but you made total sense. I went the other way and bought a new construction at the beginning of the year. Let’s go rebound!